Investors sell-off triggers worst day of the year

Australian shares have suffered their largest one-day sell-off of the year amid fears that Europe will lose the political resolve to maintain the tight fiscal policies necessary to resolve its debt problems and concerns over weak US economic data.

Investors dumped stocks, the Australian dollar and the euro yesterday and sought the safety of government bonds as fears for the common currency resurfaced after Francois Hollande was elected President of France and polls in Greece implied the two main parties would not be able to form a government.

The major S&P/ASX 200 Index dropped 94.7 points, or 2.16 per cent, to 4301.3. The Australian dollar slumped to $US1.011 from as high as $US1.0281 in the previous session.

The yield on the benchmark 10-year government bond hit a record low of 3.41 per cent, its narrowest in 61 years, while the 3-year bond hit a new low of 2.67 per cent, more than 1 per cent below the official cash rate of 3.75 per cent, indicating a further slowdown.

The benchmark index is up 6 per cent this year but yesterday was its largest one-day fall since a 2.38 per cent decline on December 19. It follows the worst week this calendar year for the S&P 500.

Regional markets also fell. The Nikkei closed down 261.1 points to 9119.14 while the Hang Seng closed down 549.35 to 20,536.65 and the Shanghai Composite was flat at 2451.95. In early European trading most key markets were down more than 1.5 per cent.

The impasse in Greece implies key conditions of the most recent rescue package may not be able to be met, sparking concerns of a sovereign default and the nation’s exit from the European Union.

Another election in Greece could be called within the next few months and investors expect the false sense of security provided by the European Central Bank’s long-term refinancing operation will now fade away.

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“Greece is the real worry. What you’ve got is a stalemate that points to another election and given all the uncertainty in the region that’s the last thing investors need right now,’’ said BT Investment Management head of equities, Crispin Murray.

Westpac Banking Corp executive director Russell Jones said the euro’s fate was still in the balance despite loans worth €1.1 trillion taken out by European banks under the ECB’s two long-term refinancing operations.

“Events of the weekend might not quite be the straw that breaks the camel’s back but we’re back to huge amounts of uncertainty and investors will be watching how the balance of power plays out between France and Germany,’’ Mr Jones said.

One of the biggest risks was that Greece had to come up with €12 billion of spending cuts by the middle of June and might try to renegotiate its bailout packages.

Peripheral economies were given some support for a reduction in their tight cost-cutting plans, European economics commissioner Olli Rehn said on Saturday.

He said some of the austerity measures could be loosened and the EU needed to show some flexibility on budget deficit rules.

The other worry for investors was a US report that showed just 115,000 jobs were created in April, less than the 160,000 most economists had forecast, causing a plunge in US stocks.

Yesterday’s sell-off in the Australian market came despite the release of better than expected economic data that suggested the worst might be over for the local economy.

Retail sales rose almost five times more than expected in March, up 0.9 per cent against forecasts of 0.2 per cent as consumers spent more in cafes and restaurants. It was the highest monthly increase in a year.

Building approvals rose 7.4 per cent in March after an 8.8 per cent fall in February and much higher than the 2 per cent gain forecast by many.

But some economists were suspicious of the strong retail trade data, suggesting an early Easter might have brought forward some spending.

After the very strong overall start to the year, Investors Mutual portfolio manager Hugh Giddy was looking for a correction. “We seemed to get a little bit of one in April but it didn’t seem to last long and the Aussie market went up to new highs and the US got close to all-time highs," he said. “And I have to say it felt a bit wrong to me."

However, he did not expect the French election result to change the outlook for Europe, which remained broadly hampered by its debt problems, low growth and austerity.

The risk, though, was thinking Australia was immune to the same pressures. “The fact is leverage in Australia is also a problem. The banks have to fund current account deficit by borrowing overseas. That hasn’t been such a problem recently because they’ve got a lot of deposit money that has come out of other places," he said.

“The fact is we are a savings-short nation, we have too much debt, the household balance sheet doesn’t look that good and the government balance sheet is not fantastic any more.

“We suffer too, and that’s why our market will fall when overseas markets fall, because we suffer from some of those same conditions."

Mr Murray said the bright spots for investors were the lower Australian dollar and the prospect of further interest rate cuts.